U.S. Fed stimulus expected
Loonie slides before policy announcement
“The only question is what exactly they’re going to do.”
MICHAEL GREGORY, BMO CAPITAL MARKETS
The U.S. Federal Reserve is set to end weeks of speculation over how, not if, it will offer up another round of economic stimulus when its two-day policy meeting wraps up Thursday.
Will it be a third helping of quantitative easing, perhaps focusing more narrowly on buying mortgage-backed securities (MBS), or simply an extension of its current 2014 threshold on interest rate movements?
“They’re going to ease,” said Michael Gregory, senior economist at BMO Capital Markets. “The only question is what exactly they’re going to do, and the big debate is (whether it will be) QE3.”
Some analysts feel Fed chairman Ben Bernanke and his team should hold fire on QE3 until there is more evidence of a deepening slowdown, while others say not pulling the trigger could result in a market sell-off, at least initially.
Stocks have risen more than five per cent in Canada and the United States since early August, partially driven by investor expectation of QE3.
Markets were basically flat Wednesday, while the Canadian dollar slid against the U.S. currency with traders and investors looking ahead to the policy announcement.
“If they don’t do anything, there will probably be a pretty swift selloff in stocks and a bounce in the U.S. dollar,” said Colin Cieszynski, market strategist at CMC Markets Canada.
“If they announce QE3, you might see a bit of a bounce in stocks, although a lot has already been priced in.”
Whatever the decision, it will be the second major benchmark this week for the global economy, coming after a much-anticipated decision a day earlier by Germany’s Constitutional Court not to block new bailout and budget rules seen as crucial to easing the eurozone debt crisis.
Even before that, the European Central Bank took strong action to bolster the region’s defences, saying after its Sept. 6 policy meeting it would buy unlimited amounts of government bonds to help lower borrowing costs for debt-heavy countries.
Judging by Bernanke’s Jackson Hole, Wyo., address two weeks ago “expect to see them extend their forward (rate) policy guidance from ‘at least through 2014’ to at least well into 2015 before taking further action,” say BMO economists.
The minutes of the Fed’s previous policy meeting whet the appetite of investors for some kind of action.
“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,” the minutes said.
A major concern in the U.S. — as well as in Canada — has been the erratic growth in employment in recent months. For the Fed, the poor jobs numbers may have convinced policy-makers that “fairly soon” has arrived.
Beyond extending its conditional guidance on current interest rates — now at near-zero — from “at least through late 2014” until sometime in 2015, the U.S. central bank still has options it can reuse, or retool.
The first round of quantitative easing, launched in November 2008, essentially took the form of printing money to purchase treasuries and mortgage-backed securities. That was followed in August 2010 by QE2, which was limited to treasuries. Together, the Fed’s purchases totalled $2.3 billion US.
In September 2011, policy-makers introduced “Operation Twist.” That $400-billion US program focused on selling short-term securities and buying ones with longer terms. The program was extended to the end of the year, and another $267 billion US set aside.
BMO’s Gregory said it’s difficult to know how much expectation of QE3 has been priced into the markets.
“It wasn’t even clear from the last (Fed) minutes as to whether or not the Fed itself was convinced if they did QE whether they would buy MBS, whether they would buy treasuries, whether they would do a program, a set amount, like they’ve done in the past, or an open-ended amount? So there was a lot they’re sort of deciding,” he said.